Input sought on regulations for financial institutions regime

23 April 2021

The Ministry of Business, Innovation and Employment (MBIE) has put out draft regulations and some proposed amendments to the regime created by the Financial Markets (Conduct of Institutions) Amendment Bill (the Bill). Submissions close on 4 June. 

The consultation is being run through two discussion documents:

Consultation on options for regulations

The Bill contains a number of regulation-making powers, including in relation to:

  • fair conduct programme requirements, and the publication of information around them
  • sales incentives
  • calling in contracts of insurance under the fair dealing provisions in Part 2 of the Financial Markets Conduct Act (FMCA)
  • exclusions of certain occupations or activities from the definition of ‘intermediary’, and
  • provisions dealing with the Lloyd’s insurance market.

MBIE has indicated that the regulations will be finalised by the end of this year or early next year, to come into force in early 2023.

Fair conduct programmes

On the recommendation of the select committee, additional requirements have been inserted in the Bill at section 446M regarding the areas fair conduct programmes must cover. These include:

  • designing and managing the provision of products and services
  • identifying, monitoring and managing conduct risks
  • remediating conduct issues, and
  • managing or supervising employees, agents and intermediaries.

The discussion document seeks feedback on whether any further regulations are required to support these amendments. It notes the importance of getting the right balance between a principles-based and a rules-based conduct regime, to achieve a positive culture shift for the benefit of consumers.

Submissions are also sought on whether financial institutions should be required to publish on their websites information additional to that already prescribed in the Bill – given that the objective of publication is to assist consumers to make informed decisions and to ensure that they understand how to make a complaint should they be treated unfairly.

Sales incentives

The regulatory focus is on those incentives which were identified as problematic in the Financial Markets Authority/Reserve Bank conduct and culture report of 2018 and in the FMA’s subsequent reports into conflicted remuneration in the insurance industry and bank incentive structures, in particular:

  • monetary incentives
  • soft incentives (such as gifts, prizes, trips or shares of stock options in the employer’s business)
  • incentives for referrals, and
  • inducements (an opportunity to earn, win, or otherwise qualify for a reward, a threshold or ‘gateway’).

MBIE wants feedback on options to:

  • prohibit sales incentives based on volume or value targets, and what the likely impacts of prohibition may be for financial institutions, intermediaries and/or consumers, or
  • adopt a more selective ‘principle-based’ approach and, if so, what incentives should be specifically excluded.

Calling in contracts of insurance

Declaring contracts to be financial products would bring them within Part 2 of the FMCA, closing a gap in the legislation.

Lloyd’s insurance market

The Lloyd’s insurance market has a unique structure for the provision of insurance which is currently not captured by the Bill. Targeted consultation is being carried out with Lloyd’s to deal with this anomaly.

Consultation on treatment of intermediaries

As part of their fair conduct programmes, the Bill requires financial institutions and insurers to have policies, processes, systems and controls in place for the oversight and training of intermediaries to ensure good outcomes for consumers.

The term “intermediary” as currently defined in the Bill extends beyond those involved in sales and distribution to also catch administrative, advisory and fulfilment services, including claims management companies and lawyers.

In response to submissions that the Bill’s requirements in respect of intermediaries overlap the new financial advice regime, and will require multiple compliance programmes for intermediaries, MBIE proposes two main amendments to the Bill:

Amend the definition of “intermediary” to:

  • capture only persons involved in the sale or distribution of a financial institution’s relevant service or associated products, and/or
  • refine the scope of who is covered as an agent.

Narrow the obligations that apply to financial institutions in respect of “intermediaries”.

The options are:

  • Minimal changes – remove the obligation on intermediaries to “follow the procedures or processes that are necessary or desirable to support the financial institution’s compliance with the fair conduct principle”, or
  • Significant changes – require financial institutions to have processes for:
    • requiring training for each intermediary in the financial institution’s relevant services and associated products
    • setting conduct expectations of intermediaries
    • monitoring intermediaries to ensure they are supporting the financial institution’s compliance with the fair conduct principle (rather than “managing or supervising”)
    • establishing robust and transparent processes for dealing with misconduct, or
  • Distinguishing between FSLAA and non-FSLAA intermediaries to reflect the fact that the first are already subject to conduct regulation under FSLAA.

Our comment

MBIE notes that the Bill will introduce a new and complex regulatory regime for both the financial sector and the FMA.

We encourage all financial institutions, insurers and the intermediaries who market and sell their products to engage in the consultation process as the outcomes will be important to the detail and workability of the new regime.

Please contact us if you would like assistance preparing your submission, or if you would like more information on the Bill and its implications for your business.

Quick Links

Conduct of financial institutions regulations – MBIE
Discussion document: Regulations to support the new regime for the conduct of financial institutions
Consumer summary: Regulating the conduct of financial institutions
Discussion document: Treatment of intermediaries under the new regime for the conduct of financial institutions
Chapman Tripp Insight: Financial institutions Bill better for second look

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